We argue that, in the pharmaceutical industry, excessive patent duration can deter investments in innovative treatments in favor of me-too drugs. The point is that too-long durations foster incentives to collude to delay investments in R&D for innovative treatments. We give a set of sufficient conditions for which collusion is a subgame-perfect equilibrium; that is, the threat of punishing any deviator is credible. We then show that reducing current duration always breaks down market discipline, and so does an increase in duration for innovative treatments. Optimal patent duration must then be a trade-off between breaking down market discipline and rewarding innovation.
Keywords: Collusion; Me-too drugs; Medical innovation; Patent duration.